MetLife Probed by Regulators as Asset Accounts Called Deceptive

Sept. 28 (Bloomberg) -- Regulators in three U.S. states
have started or widened examinations of how life insurers pay
beneficiaries after a federal judge described MetLife Inc.’s
marketing of asset accounts as “inherently deceptive,” even as
he dismissed the underlying suit against the company.

The Sept. 10 statement by U.S. District Judge Larry Hicks
in Reno, Nevada, may prompt regulators in that state, California
and Georgia to use their broad legal powers to impose changes on
insurers’ marketing, disclosures and practices.

Hicks said MetLife, the biggest U.S. life insurer, gave
consumers the misimpression that its Total Control Account Money
Market Option account for death benefits was insured by the
Federal Deposit Insurance Corp. Still, he threw out the suit,
which claimed the insurer unfairly profited on the policy,
saying the beneficiary had not lost money.

“This statement that the accounts are ‘inherently
deceptive’ -- that’s something that raises great concern in my
mind,” Nevada Insurance Commissioner Brett Barratt said in an
interview. “They are strong words.”

The U.S. House Oversight and Reform Committee and New York
Attorney General Andrew Cuomo previously started investigations
of so-called retained-asset accounts after Bloomberg Markets
magazine reported in July that carriers profit by holding and
investing $28 billion owed to beneficiaries.

‘Ordinary Reasonable Person’

“An ordinary reasonable person, provided with the
contracts at issue, would be under the impression that they were
receiving either a money-market account or an account associated
with money market protections,” Hicks wrote.

John Calagna, a spokesman for New York-based MetLife, said
the company is cooperating with pending investigations and that
the ruling dismissing the lawsuit was “completely” in the
firm’s favor.

“Insurers have prevailed in almost all of these
lawsuits,” Calagna said. “There’s a message there -- that
these accounts provide a benefit.”

The account is now called a Total Control Account, without
the words “money market,” Calagna said. Curtis Coulter, a
lawyer for plaintiff Jamie Clark, said he’s appealing the
dismissal.

Interest Rate

Clark, a beneficiary of her father’s MetLife policy,
claimed in a suit filed in 2008 that the insurer breached a
contract when it created a $50,000 retained-asset account for
her. MetLife paid her a “relatively insignificant rate of
interest, which was less than it earned by keeping the money in
its own accounts,” according to the complaint. Clark sought
class-action, or group, status for the case.

Hicks found that Clark hadn’t suffered damages because
MetLife paid interest above the prevailing money-market rate. In
dismissing the case, the judge said MetLife “continually” made
reference to money-market accounts throughout its retained-asset
account agreement.

The judge also said the name “Total Control Account Money
Market Option” was “inherently deceptive because it gives the
beneficiary the impression that the account is either a money-market account, or is associated with a money-market account,
and contains the same benefits and protections that a money
market account offers, namely that the account is insured by the
Federal Deposit Insurance Corp. if MetLife was to become
insolvent and file for bankruptcy.”

According to its website, the FDIC insures money-market
deposit accounts offered by banks. Money-market mutual funds are
not insured.

Made $10 Million

MetLife said it made more than $10 million last year in
investment earnings for retained-asset accounts paying
beneficiaries the contractually set interest rate, the judge
said. Bloomberg Markets reported that MetLife makes $100 million
to $300 million a year from returns on death benefits it holds.

Peter Kochenburger, executive director of the Insurance Law
Center at the University of Connecticut in Hartford, said the
judge’s statement, along with comments by other courts reviewing
retained-asset accounts, may spur action by state insurance
regulators.

“This is certainly an invitation for government entities
that have the power to investigate and litigate,” Kochenburger
said.

Unlike private plaintiffs, regulators need not prove
damages when they sue over deceptive practices, he said.
Regulators generally can do anything from warning consumers to
ordering changes to insurers’ disclosure language, to possibly
even banning retained-asset accounts, he said.

‘Higher Priority’

Barratt, the Nevada insurance commissioner, said his
department’s review of the accounts will become “a higher
priority” because of the statement from Hicks.

Matthew Gaul, deputy superintendent for life insurance in
New York, said Hicks’s statement will “of course” factor into
his department’s existing probe.

“We will definitely be looking at this issue, in part
because of the ruling,” said Ioannis Kazanis, a spokesman for
California Insurance Commissioner Steve Poizner.

Georgia Insurance Commissioner John Oxendine said
regulators routinely examine whether insurers provide consumers
what they’ve promised in policies and whether they are acting
“in a proper manner.” He said he had already shown Hicks’s
opinion to his examiners.

“This does concern me,” he said in an interview.

Favoring Industry

Most court rulings on retained-asset accounts have favored
the insurance industry. Plaintiffs in these cases have sought to
recover the difference between what the insurer made investing
the retained-asset funds and the amount paid to the beneficiary.

Future suits are likely to cite Hicks, said Mark Geistfeld,
who teaches civil litigation at New York University School of
Law. The statement that the account’s name was “inherently
deceptive,” while not the last word in other cases, may
influence judges, he said.

Beneficiaries are also likely to look to a 2009 decision by
a federal appeals court in Boston in a case against Unum Life
Insurance Co. of America, a unit of Chattanooga, Tennessee-based
Unum Group, Geistfeld said.

In reinstating a case that a lower court had dismissed, the
three-judge appeals panel said Unum acted as a fiduciary by
retaining and investing death benefits. Unum had provided
beneficiaries with a book of drafts that it called a
“checkbook.”

‘Euphemistically Named’

“The euphemistically named ‘Security Account,’ accompanied
with a checkbook, was no more than an IOU which did not transfer
the funds to which the beneficiaries were entitled out of the
plan assets and hence Unum remained a fiduciary,” the appeals
court wrote. A U.S. district judge in Boston approved a $5
million settlement in that case on Sept. 22.

A finding that the insurer owes a fiduciary or special duty
increases the likelihood that cases will succeed, because
fiduciaries may not invest beneficiaries’ funds for their own
profit, plaintiffs lawyers have argued.

Courts are divided on the question. In the Unum case, the
appellate judges said Unum was a fiduciary for funds owed to
beneficiaries with retained-asset accounts created by an
employee-benefit plan.

In July, a federal appeals court in New York said there was
no fiduciary duty for retained-asset accounts created by the
purchase of insurance directly from an insurer. The court also
said that Mony Life Insurance Co., a unit of AXA SA, France’s
largest insurer, hadn’t deceived the beneficiaries by investing
the money for its own benefit, as the plaintiffs claimed.

Trial-level federal courts in New Jersey, New York and
Nevada have also ruled for insurers.

‘Well Established’

“The law is well established that there is no fiduciary
duty between an insurer and the beneficiary of a life insurance
policy,” Phillip Stano, the former chief litigation counsel for
the Washington-based American Council of Life Insurers, an
industry group, said in an e-mailed comment.

Aetna Life Insurance Co., a unit of Hartford-based Aetna
Inc., agreed in March to pay additional interest to current
holders of retained-asset accounts, and to provide accidental-death and dismemberment insurance to former holders of such
accounts, to settle a Nevada lawsuit by Terence McCreary.

“We are agreeing to settle the McCreary lawsuit to avoid
the significant expense that accompanies class-action
litigation,” Cynthia Michener, an Aetna spokeswoman, said in an
e-mailed statement. Court papers don’t reflect the value of the
settlement.

Other suits are pending, including one in Massachusetts
that accuses Prudential Financial Inc.’s Prudential Insurance
Co. of America of improperly collecting interest on unpaid
military veterans’ life-insurance benefits. Prudential hasn’t
yet filed a response in court.

‘Same Position’

“Alliance accounts are an important benefit that have been
used for more than a decade to provide a safe, efficient and
confidential way for the full payment of benefits to
beneficiaries,” Bob DeFillippo, a Prudential spokesman, said in
an interview. He declined to comment specifically on the
Massachusetts case.

Jeffrey Stempel, an insurance law professor at the William
S. Boyd School of Law at the University of Nevada, Las Vegas and
author of “Stempel on Insurance Contracts,” said the judge’s
statement in the Clark case signals a recognition by courts that
retained-asset accounts are flawed. He said he expects
beneficiaries to file more cases as regulators increase
oversight.

“It should be a wake-up call,” he said.

The case is Clark v. Metropolitan Life Insurance Co., 08-cv-158, U.S. District Court, District of Nevada (Reno).

To contact the reporter on this story:
David Glovin in New York State Supreme Court
in Manhattan at dglovin@bloomberg.net.